On Thursday, April 16, 2026 Alabama Governor Kay Ivey signed House Bill 527 into law. This legislation contains two temporary tax cuts designed to help Alabamians – one is a $1,000 deduction on taxes for overtime pay, and the second one eliminates state tax on groceries for 60 days. The income tax reduction for overtime compensation will apply for tax years 2026 through 2028. The grocery tax suspension will occur May 1, 2026 through June 30, 2026.
2026 Alabama Overtime Tax Provision
The tax relief for overtime compensation allows workers to deduct up to $1,000 of qualified overtime pay from their state taxable income for tax years 2026 through 2028. This complements the Federal provision that also eliminates up to $12,500 ($25,000 for joint returns) of Federal tax on overtime pay through 2028.
Eliminating tax on overtime pay is not new for Alabama workers. From 2024- June 30, 2025, Alabama completed a trial phase to exempt all tax on overtime pay – however that exemption is now expired and the new deduction is capped at $1,000.
The 2026-2028 Deduction is retroactive to the start of the 2026 tax year. Employers were responsible for reporting exempt overtime wages in Box 14 of the employee’s Form W-2 using the indicator “EX OT WAGES” during the previous exemption period, and it is likely the same will apply for this new deduction, although we await official directions from the Alabama Department of Revenue.
2026 Alabama Grocery Tax
Alabama legislators have been steadily addressing the grocery tax over the last few years. Alabama is one of 13 states that taxes groceries at the state level. In addition to the state tax, there are local taxes on groceries – and in some areas of the state, the combined tax can be as high as 10%. In 2025, the state grocery tax was reduced to 2%, effective September 1, 2025 – down from 4% in 2023.
Now, from May 1- June 30, 2026 the state will provide a special 60-day suspension of the 2% state tax. Local city and county taxes will continue to be applied.
Eligible Items: Generally, items that are also eligible for purchase with Supplemental Nutrition Assistance Program (SNAP) benefits qualify for the eliminated tax. This includes fruits and vegetables, meat, poultry, fish, dairy products, bread, cereal, other snacks and non-alcoholic beverages, seeds and plants that produce food. Items that are not considered “food” and therefore are subject to the full 4% state tax include the following: alcoholic beverages, tobacco products, hot prepared foods, pet food, cleaning supplies, paper products, vitamins and supplements, cosmetic items, hygiene items.
If you have any questions about tracking and submitting the OT tax provision for your employees, please set up a meeting with our team. Tax laws change regularly which means your operations and strategy also need to be updated regularly. Avizo is ready to work with you to build a custom plan that will keep you compliant and help you reach your goals.
Taylor Clinkenbeard, CPA
Taylor is a Manager in our tax and client accounting services teams. She has developed specific expertise in software, accounting processes, and tax laws to serve our clients.
